Essay on How to Develop and Implement a Winning Trading Sytem

19163 Words Jul 18th, 2012 77 Pages
Beyond Technical Analysis

Beyond Technical Analysis: How to Develop and Implement a Winning Trading System

Tushar S. Chande, PhD

John Wiley 61 Sons, Inc. New York • Chichester • Brisbane • Toronto • Singapore • Weinheim

This text is printed on acid-free paper. Copyright © 1997 by Tushar S. Chande. Published by John Wiley & Sons, Inc. Data Scrambling is a trademark of Tushar S. Chande. TradeStadon, System Writer Plus, and Power Editor are trademarks of Omega Research, Inc. Excel is a registered trademark of Microsoft Corporation. Continuous Contractor is a trademark of TechTools, Inc. Portfolio Analyzer is a trademark of Tom Berry. All rights reserved. Printed simultaneously in Canada. Reproduction or translation of any part
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5 Robust Trading Systems: TOPS COLA 6 How Do You Implement a Trading System? 7 Who Wins? Who Loses? 8 Beyond Technical Analysis 9 2 Principles of Trading System Design Introduction 11 What Are Your Trading Beliefs? 12 Six Cardinal Rules 14 Rule 1: Positive Expectation 15 Rule 2: A Small Number of Rules 17 11

viii Contents Rule 3: Robust Trading Rules 22 Rule 4: Trading Multiple Contracts 29 Rule 5: Risk Control, Money Management, and Portfolio Design 32 Rule 6: Fully Mechanical System 36 Summary 37 3 Foundations of System Design Introduction 39 Diagnosing Market Trends 40 To Follow the Trend or Not? 44 To Optimize or Not to Optimize? 48 Initial Stop: Solution or Problem? 52 Does Your Design Control Risks? 60 Data! Handle with Care! 64 Choosing Orders for Entries and Exits 66 Understanding Summary of Test Results 67 What the Performance Summary Does Not Show 70 A Reality Check 71 4 Developing New Trading Systems 73 Introduction 73 The Assumptions behind TrendFollowing Systems 74 The 65sma-3cc Trend-Following System 75 Effect of Initial Money Management Stop 88 Adding Filter to the 65sma-3cc System 93 Adding Exit Rules to the 65sma3cc System 99 Channel Breakout-Pull Back Pattern 101 An ADX Burst Trend-Seeking System 111 A Trend-Antitrend Trading System 116 Gold-Bond Intermarket System 123 A Pattern for Bottom-Fishing 132 39

Contents Identifying Extraordinary Opportunities 140 Summary 144 5 Developing Trading System Variations 147

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